Building an IT budget for a smaller company: line items and ratios
The line items in an IT budget, benchmark ratios by sector, and a simple method for building and tracking your budget.
Many smaller companies have no formal IT budget. Spending is spread across several accounting lines, nobody has an overall view, and trade-offs are made under pressure. Yet structuring your IT budget is an essential lever for running the business.
The main spending categories
Infrastructure and hosting
- Servers (physical or cloud), storage, backup
- Internet connectivity, VPN links, IP telephony
- Application hosting (SaaS, IaaS, PaaS – infrastructure/platform as a service)
Software and licences
- Vendor licences (ERP, CRM, office suite, email)
- Recurring SaaS subscriptions
- Security tools (antivirus, firewall, EDR – Endpoint Detection & Response)
People
- Internal IT team (salaries including employer costs)
- External services (managed services, development, consulting)
- Training for IT teams and for users
Projects and investment
- New deployments (migration, redesign, new software)
- Hardware (workstations, peripherals, network equipment)
Maintenance and support
- Maintenance contracts with software vendors and hardware manufacturers
- User support (in-house or outsourced)
- Reducing technical debt
Benchmark ratios
The IT budget of a smaller company generally sits between 2% and 5% of revenue, with variations by sector:
| Sector | Average share of revenue |
|---|---|
| Services / Consulting | 4 to 6% |
| Manufacturing | 1.5 to 3% |
| Retail / Distribution | 2 to 3% |
| Healthcare | 3 to 5% |
These figures include all spending, both operating and investment. An abnormally low ratio often signals under-investment that will be paid for later in technical debt.
A method for building your budget
- Take stock of what exists: list every item of IT spending from the past year, including spending carried by other departments (SaaS subscriptions taken out by marketing, for example).
- Categorise: allocate each item of spending to the categories described above.
- Separate Run from Build: keep day-to-day operations (Run) apart from project investment (Build). A healthy split is 70% Run / 30% Build.
- Project forward: factor in planned projects, hardware refresh cycles and vendor price increases.
- Set aside a reserve: keep 5 to 10% for the unexpected (a major incident, an urgent need).
Tracking your budget
A budget is only worth having if it is tracked. Put in place a monthly dashboard covering:
- Actual spending vs. budget
- Variances, with an explanation for any drift
- An updated year-end forecast
This tracking should be shared with the executive team at least once a quarter. Above all, it should lead to decisions: cutting unnecessary spending, renegotiating a contract, deferring a purchase or accelerating a critical piece of work. Without a decision attached to it, the dashboard becomes one of those IT dashboards that aren’t.